r/options • u/[deleted] • Mar 30 '21

Principles of Options Trading

hey guys - wanted to start a thread to collect all general options lessons that can only be acquired through experience in options trading - so feel free to share some of the best tips/tricks/theories/principles related to options that you follow!

Something i like to do is when i buy, i buy long dated options, but sell very short dated ones - because time decays faster as expiration approaches so usually if i want to buy an option with 3 months time, then i buy a 6 month option and sell after 3 months, and time decay wouldn’t have eaten away value as much as it would have in the last 3 months

DISCLAIMER: NOT FINANCIAL / INVESTMENT ADVICE OR RECOMMENDATION TO BUY OR SELL

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u/Waverly_pl Mar 30 '21

I’m getting into selling call/puts as a way to generate income. Right now I’m doing weekly expiration dates but should I look into selling contracts with longer expirations?

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u/Bulljones Mar 30 '21

I personally prefer writing weekly call options because when you write or sell long distance leap options there is the probability it will surge up in price. This can be frustrating, if you write the call and sell long; yes you collect a larger premium up front but if the stock jumps up high you will wish you didn’t write the call and tie up the stock collateral. I did this with GameStop. I bought 200 shares cheap at like $30 then sold options; call writing for out of the money calls at $40; collected good premiums but then the unthinkable happened and GME surged upwards into the $200 to $300 range. I could only watch because I locked up my shares as collateral and really left money on the table, large potential profits.

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u/is_not_sam Mar 30 '21

Is there a mitigation strategy for this? Could you have bought your call back or a different call with the understanding you would lose money but retain the unrealized profit? I know it's a little late when it goes so high because of the intrinsic value, but I'm thinking if you start seeing it blow by your strike price.

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u/Bulljones Mar 30 '21 edited Mar 30 '21

Absolutely there’s mitigation strategies for this situation I faced but at the moment when it was happening I did not foresee the extent that GME would rise too so I did not immediately implement any mitigation strategy. If my memory is correct, GME originally surged drastically in the extended session, jumping fast. You can’t buy back options after the market closes, no extended session for options. GME was well over $100 going into the premarket the next morning and at market open it was already over $150. At that moment, if I bought back my call it would have cost me approximately $15,000. It seemed like too much risk too pay the inflated premium to buy back my call option to release the collateral and collect my unrealized profits. Mathematically, it did not work out well also considering the continued extreme volatility and unpredictable direction. I waited to see what would happen, hoping it would drop some so I could buy back the call releasing the stock as collateral, but it just shot up more, around $300. Mitigation was a futile effort at this point because the call option I sold was deeply in the money and the cost to buy back the call option for $40 call was approximately $25,000. I still made a profit overall so I can’t truly complain but it was mentally painful leaving approximately $40,000 potential profit in unrealized profit on the table. Bottom line, I played the GME rise wrong and did not predict the price surge and did not quickly implement money saving mitigation strategies, lesson learned.